Corporate Canada landed a major win yesterday as the Conservative government focused on tax cuts and economic performance in its first budget, although some economists warned that the stimulative effect may lead to higher interest rates and more pain for manufacturers.
The budget was highlighted by greater-than-expected tax cuts for both corporations and consumers, modest spending increases for economically productive items such as education, and promises that the new Tory government was only just getting started in its efforts to boost Canada's lagging productivity.
Although the previous Liberal government implemented a number of tax cuts since eliminating the deficit in the late 1990s, spending jumped by an average of 8 per cent a year over the past four years.
The government says the new budget offers more than $2 in tax cuts for every $1 in new spending.
The budget's tax cuts and other stimulative measures, however, may make it more difficult for Canada's central bank to keep a lid on interest rates, which could further fuel the Canadian dollar's rapid rise, economists said.
If Bank of Canada Governor David Dodge is forced to raise interest rates, that would take a bite out of many consumers' pocketbooks while further fuelling the Canadian dollar's rapid rise. A higher-valued currency makes it even more difficult for the troubled manufacturing sector and other exporters to sell abroad.
The Bank of Montreal's economics department called the budget "mildly stimulative," but emphasized that the central bank no longer has much breathing space. "With the Canadian economy having no slack, this budget will likely keep the Bank of Canada in tightening mode."
Jayson Myers, chief economist at the Canadian Manufacturers & Exporters, cautioned that the budget could spur enough consumer spending to put pressure on Mr. Dodge to maintain higher interest rates -- and a valuable loonie.
"A 1-per-cent increase in the value of the dollar is going to wipe out a lot of those benefits that might be there in the budget."
Mr. Myers said a higher dollar will lead to the end of more Canadian product lines and further layoffs. "I wouldn't be surprised if we saw another 100,000 net job losses in the manufacturing sector across Canada for 2006."
Business groups said Finance Minister Jim Flaherty's first budget was the most important for economic growth since 2000, when then-finance minister Paul Martin used a burgeoning surplus to unveil a schedule for $100-billion in tax cuts over five years. Mr. Flaherty's package yesterday, aided by the flexibility that comes with a soaring economy, historically low unemployment and booming commodity prices, is expected to mean $21.8-billion in tax cuts over the next two years.
Nancy Hughes Anthony, president of the Canadian Chamber of Commerce, said the Tory budget is "in a league" with its 2000 counterpart.
Perrin Beatty, chief executive officer of Canadian Manufacturers & Exporters, said yesterday's budget was a pleasant surprise.
"This is encouraging -- a better budget for business than we have seen in the last five years," Mr. Beatty said. "It includes measures that will have a real benefit for business."
The government has also vowed to limit program spending rises to 5.4 per cent in 2006-07 and 4.1 per cent in the year after that. Both of those figures are less than the expected rate of growth for nominal gross domestic product -- the key statistic that determines government revenue -- and dramatically lower than the Liberals' spending rises in each of the past four years.
Mr. Flaherty also said that the 2005-06 federal surplus is now expected to be $8-billion, which will be used to pay down the government's massive debt. As it stands now, the government plans to pay down about $3-billion a year in ensuring years.
Craig Wright, chief economist at Royal Bank of Canada, said the budget took "steps in the right direction" toward improving Canada's competitiveness but that it could have gone even further. "Maybe small steps aren't enough right now."
With a report from Tavia Grant
